About Me

greekdefaultwatch@gmail.com
Natural gas consultant by day, blogger on the Greek economy by night. Trained as an economist and political scientist. I believe in common sense and in data, and my aim is to offer insight written in language that is clear and convincing.

04 October 2005

Bali and Jakarta

Two things happened in Indonesia this weekend—the first was the attack in Bali which killed 22 and wounded over 100, and the second was the increase in the price of fuel mandated by the Jakarta government, followed by moderate protests. On Monday, the Indonesian rupiah opened down 1.5% but appreciated quickly to close slightly down from the US dollar; and the Jakarta Stock Exchange’s index closed up 0.4% (1). Did the markets get it right?

Following the announcement that the government would reduce fuel subsidies (which in turn was linked to a credit downgrade by the Standard and Poor’s rating agency), the stock market has been going up, and the rupiah has appreciated—both consistent with what economic theory would predict: a reduction in subsidies increases the country’s fiscal solvency, reduces expected inflation (to finance the subsidies), and lowers the crowding out effect of government borrowing (thus boosting the stock market).

Which brings up back to the market reaction on Monday; the markets predicted that what the Jakarta government does to change the macroeconomic fundamentals of the country is more significant for the country’s future than what three suicide bombers do. And when the Financial Times came out with a piece called “Bombing season is a cyclical inconvenience,” one has to wonder if the world has adjusted to terrorism as a fact of life. The news from Jakarta could be that we have.